Alphabet Inc. raised its capital spending forecast to as much as $205 billion this year, reigniting concerns about a lack of fiscal discipline in the race to dominate artificial intelligence.The Google parent company boosted its projected capital expenditures for the year to a range of $195 billion to $205 billion, up from a previous forecast of $190 billion. Shares fell more than 6% on Thursday. It was a reminder that the full cost of Silicon Valley’s AI rivalry is still largely unknown.Alphabet was the first of the big tech companies to report quarterly results. Meta Platforms Inc., Microsoft Corp. and Amazon.com Inc. follow next week. Altogether, the four companies telegraphed in April that they’d be spending as much as $725 billion this year on their AI ambitions. If Alphabet is any indication, that sum will be larger by the end of next week. That’s even while the returns on those investments remain unclear. Alphabet’s bigger spending plan “does not sit well,” Investing.com senior analyst Thomas Monteiro said. “Add to that an increasing rates environment and a continuous supply-demand crunch in AI infrastructure, and the notion that the company would fund itself with cash flows forever might be starting to fade.”In another indication of the immensity of Alphabet’s capital spending, the company’s quarterly cash flow was negative for the first time since going public more than two decades ago, according to data compiled by Bloomberg. Negative free cash flow came in at $5.9 billion in the period.The company said the higher guidance reflects its efforts to accelerate an expansion of AI computing capacity and book more revenue from cloud-computing clients. It stands to intensify investor scrutiny of AI investments. Wall Street has been looking for more convincing evidence that Alphabet’s massive bet on the technology, and those of its chief rivals, are generating new growth rather than weighing on profits. Alphabet’s second-quarter results demonstrated some progress in that respect. Cloud revenue totaled $24.77 billion for the period ended June 30, up 82% from a year earlier and above the $22.46 billion that analysts had expected. The company’s cloud backlog, a measure of contracted work that hasn’t yet been recorded as revenue, grew to $514 billion, up from roughly $460 billion a quarter earlier.Cloud demand was “powered by strong demand for AI infrastructure and AI solutions,” Chief Executive Officer Sundar Pichai said on the call with analysts.Google Cloud has emerged as one of the clearest tests of whether Alphabet’s AI spending can deliver financial returns. Though it still trails behind Amazon Web Services and Microsoft Azure, the unit has become one of Alphabet’s fastest-growing businesses, fueled by demand from AI startups and enterprise customers seeking the infrastructure needed to develop and deploy AI applications. The cloud sales beat is at least a clear sign that the company’s investments are “converting into fast-growing, profitable revenue, with contracted deals coming online the moment capacity is built,” Monteiro said.Google said the majority of its cloud backlog involves typical contracts with “a broad mix of customers” and that it expects to recognize more than half of it as revenue over the next 24 months. Search advertising generated $63.27 billion in sales, falling slightly below estimates. The unit remains the backbone of Google’s advertising business and has so far weathered competition from AI chatbots. The longer-term question for investors is whether its AI model Gemini can help Google defend its position in search as the way people interact with information changes.Monthly active users of Google’s Gemini AI system totaled 950 million, above estimates but below first-quarter totals. “Gemini is now within a whisker of becoming Google’s third different one billion-user consumer AI product, alongside AI Overviews and AI Mode,” Emarketer principal analyst Nate Elliott said.Google has continued to expand the Gemini family, introducing new models such as Gemini 3.6 Flash designed to improve efficiency and support enterprise AI applications. Yet delays to Gemini 3.5 Pro have raised questions about how Google plans to position the model across consumer products and developer tools, including in AI coding, where rivals Anthropic and OpenAI have gained traction with developers.At the same time, Pichai sought to shift attention to Gemini 4, saying on the call that he was encouraged by its progress and describing it as a much larger, next-generation frontier model that Google is prioritizing in training. With the launch of Gemini 4, Google will begin releasing models at a faster clip, issuing new ones “almost at a monthly cadence,” Pichai said. That would bring Google into parity with rivals Anthropic and OpenAI, which both churn out regular updates.The video platform YouTube reported $11.1 billion in revenue, beating analysts’ estimates. The unit remains one of Alphabet’s strongest businesses, as YouTube expands its reach across connected TVs, creator-led programming and new AI-powered tools for viewers and creators. “YouTube is a little better than the past, breaking a multi-quarter losing streak, but it too feels like it should be doing better in this environment,” said Brian Mulberry, chief market strategist at Zacks Investment Management. Alphabet’s investment portfolio has become a source of upside for the company, with stakes in companies including Anthropic PBC and SpaceX. Gains in the value of Alphabet’s investments totaled nearly $100 billion for the quarter, sending net income soaring. The company said its equity holdings include $94 billion in SpaceX shares, $80 billion of which has short-term sale restrictions, and the rest long-term, according to its quarterly filing.Alphabet’s Other Bets division, which houses long-term ventures including life sciences company Verily and self-driving car unit Waymo, generated $382 million in revenue, falling below estimates. Alphabet has continued pouring resources into Waymo, while seeking to give some of its other experimental ventures more independence as standalone companies, Bloomberg has reported. The company said Wednesday that capital expenditures were $44.92 billion in the second quarter, which also exceeded Wall Street’s expectations of $44.15 billion. Total sales, excluding partner payouts, were $103.6 billion in the second quarter, surpassing the $101.07 billion average analyst estimate. Net income was $9.11 a share, well above Wall Street’s forecasts. Alba and Love write for Bloomberg.
